Better Quality Hurting Dealers

April 11, 2008

Like many of the best dealers, Bob Thibodeau has invested heavily in his showrooms, in recent years, particularly in the service department, which was once among his biggest revenue generators. But things haven’t worked out quite as planned, says the Detroit-area Ford retailer.

“Quality is, today, the price of admission,” Dr. David Cole, director of the Center for Automotive Research, in Ann Arbor, Michigan, tells TheCarConnection.com. The problem is that, “As quality has gone up, my service business has gone down,” laments dealer Thibodeau, and it’s not something peculiar to his showroom, or the Ford brand.

It wasn’t all that many years ago, when a customer could be expected to come up with a “punch list” of problems with a new car, defects small and large a dealer would have to fix. And other issues would crop up, often during the first few months of ownership. These days, according to data from J.D. Power & Associates and other organizations tracking quality, the typical new car is virtually trouble-free, at least during the first 90 days of ownership.

During that period, Power’s Initial Quality Survey, or IQS, shows top brands experiencing less than one “problem” for every vehicle. Even the lowest-ranked brands, such as Land Rover, now suffer fewer problems than a top nameplate, like Toyota, experienced a decade ago.

So, with fewer problems, new vehicles are spending less time in the shop, especially during the period a vehicle is covered by warranty. Normally, that is an especially lucrative source of business for dealers who make surprisingly little actually selling new cars.

Thibodeau Ford is one of many looking for ways to recoup the investment in service bays made over the last decade. It’s not always easy. Industry surveys show that consumers tend to steer clear of dealer showrooms once their vehicle is out of warranty.

“The BMW dealer I went to came up with a list of jobs that would’ve cost me a couple thousand dollars,” says Ginny Kingston, a Detroit-area advertising executive. Instead, she found half the work wasn’t needed, and ultimately paid a quarter of what the dealer wanted to get her car fixed up.

Not all dealers treat customers like that. But the bad apples have hurt the good ones, making it difficult for a shop like Thibodeau’s to bring in customers for services like oil changes. And with their big stores and heavy overhead, it can be difficult to compete on price with the fast-service shops one finds all over every town in America.

Keeping dealers profitable is critical for manufacturers, however. If a retailer’s Ford showroom and shop aren’t making money, he may shift to another franchise that appears more lucrative. So carmakers are taking steps to help dealers recover business lost to better quality.

“We are working on giving them the tools to improve their retail parts and service business,” Mark Fields, Ford’s President of the Americas, tells the Detroit News. At its annual dealer meeting, in Las Vegas, this week, Ford unveiled a new line of accessories, called Customs – everything from bedliners to custom wheels – which will be available only at its dealerships.

Other makers, ranging from Toyota’s Scion to BMW’s Mini, have crafted business models that shift towards dealer-installed and aftermarket accessories.

In many cases, large dealers have, where possible, consolidated service departments, so they can handle multiple brands, even if they are sold through separate showrooms.

Few dealers want to see quality slip again. Today’s well-informed consumer would simply go somewhere else. But there’s little question that the surge in quality has had some serious, unintended implications for the nation’s automotive retailers.

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